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on Contract Theory and Applications |
| By: | Joshua R. Bruce; John M. de Figueiredo; Brian S. Silverman |
| Abstract: | We examine how the U.S. Federal Government governs R&D contracts with private-sector firms. The government chooses between two contractual forms: grants and cooperative agreements. The latter provides the government substantially greater discretion over, and monitoring of, project progress. Using novel data on R&D contracts and on the geo-location and technical expertise of each government scientist over a 12-year period, we test implications from the organizational economics and contracting literatures. We find that cooperative agreements are more likely to be used for early-stage projects and those for which local government scientific personnel have relevant technical expertise; in turn, cooperative agreements yield greater innovative output as measured by patents, controlling for endogeneity of contract form. The results are consistent with multi-task agency and transaction-cost approaches that emphasize decision rights and monitoring. |
| JEL: | H11 H57 L14 L24 L33 O32 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24724&r=cta |
| By: | Jonathan Ma (Harvard University); Scott Duke Kominers (Harvard Business School, Entrepreneurial Management Unit) |
| Abstract: | In many-to-many matching with contracts, the way in which contracts are specified can affect the set of stable equilibrium outcomes. Consequently, agents may be incentivized to modify the set of contracts upfront. We consider one simple way in which agents may do so: unilateral bundling, in which a single agent links multiple contracts with the same counterparty together. We show that essentially no stable matching mechanism eliminates incentives for unilateral bundling. Moreover, we find that unilateral bundling can sometimes lead to Pareto improvement?and other times produces market power that makes one agent better off at the expense of others. |
| Keywords: | Matching with contracts; Contract design; Bundling-proofness; Substitutability |
| JEL: | C62 C78 D44 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:19-011&r=cta |
| By: | Efing, Matthias; Hau, Harald; Kampkötter, Patrick; Rochet, Jean-Charles |
| Abstract: | We show that banker bonuses cannot be understood exclusively as incentive contracts, but also incorporate a significant risk sharing dimension between bank shareholders and bank employees. This contrasts with the conventional view whereby diversified shareholders fully insure risk averse employees. However, financial frictions imply that shareholder value is concave in a bank's cash reserves---making shareholders effectively risk averse. The optimal contract between shareholders and employees then involves some degree of risk sharing. Using extensive payroll data on 1.26 million bank employee years in the Austrian, German, and Swiss banking sectors, we show that the structure of bonus pay within and across banks is compatible with an economically significant risk sharing motive, but difficult to rationalize based on incentive theories of bonus pay only. |
| Keywords: | Bank compensation; risk sharing; bank risk; operating leverage |
| JEL: | D22 G20 G21 |
| Date: | 2018–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1285&r=cta |
| By: | Hector Chade (Arizona State University) |
| Abstract: | This paper develops and analyzes a model of imperfect competition under adverse selection with private values among a finite set of heterogeneous principals (henceforth firms) for (a large number of) heterogeneous agents (henceforth workers). Firms differ in the technology that translates the effort of a worker into revenues for the firm, and we assume that firms are ordered by a single crossing property between effort and the type of technology (better firms have a higher marginal revenue from effort). In turn, workers differ in ability, which determines their disutility of effort. Firms compete with each other by offering menus consisting of wage-effort pairs (contracts), one for each type of worker. Alternative, one can think of firms offering effort-utility pairs for each type. After observing the menus, workers self-select by choosing the best contract for them. Although we cast the model as a labor market, it is straightforward to change the notation and think about it in terms of firms that produce goods of different qualities for different consumers. Instead of a revenue function there will be a cost function, instead of a wage a payment from consumers to firms, instead of worker's ability a consumer's value for quality, and instead of disutility of effort a utility for quality. The analysis reveals that instead of the standard efficiency vs. information rents trade off, the relevant one when there is imperfect competition among firms under adverse selection is efficiency vs. information rents plus market coverage trade off, since changing the menu offered not only affects efficiency and the information rents given to the workers hired but also affects the measure of workers targeted by a firm. We show that a pure strategy Nash equilibrium (PSNE) exists in this modified game (which is in turn a PSNE of the original game), and that in equilibrium the market segments into contiguous intervals, with each firm hiring only workers whose types belong to a given interval, with better firms targeting better interval of worker types and thus having better workforce composition. In equilibrium, the worst firm (in the single-crossing order defined above) distorts effort provision upward for all the types it serves, while the best distort it downward. All other firms exhibit both types of distortions: downward distortions for the lower types they serve, and upward distortions beyond an interior efficient type. Interestingly, the equilibrium effort function exhibits jumps at transition points between firms. In the firms-customers interpretation, this asserts that quality provided in equilibrium on the entire spectrum of the market will exhibit gaps, a potentially testable implication. Regarding curvature properties of the equilibrium menus, we show that it exhibits `quantity discounts' in the following sense: the wage per unit of effort is decreasing in the amount of effort induced in each worker hired by the firm (a similar interpretation holds for the other applications mentioned above regarding firms and customers). |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1241&r=cta |
| By: | Anil Kashyap (University of Chicago); Anna Pavlova (London Business School); Natalia Kovrijnykh (Arizona State University) |
| Abstract: | This project analyzes the role of asset managers on asset prices and social welfare. Asset management is a large and growing industry, central to the allocation of financial assets on behalf of investors. There is an ongoing debate over whether the actions of large asset managers might be contributing to systemic risk, and if so whether they ought to be regulated. Our goal is to shed light on this issue through the lens of a theoretical model, where asset managers’ contracts and equilibrium asset prices are jointly determined. We build a dynamic asset-pricing model, in which investors use asset managers for managing their investment portfolios. In practice, asset managers’ performance is evaluated relative to a benchmark (for instance, a market index such as S&P 500), which determines the managers’ compensation. In the model, benchmarking occurs as a result of agency frictions (moral hazard): investors optimally choose managers’ fees to be contingent on their performance relative to that of a benchmark index. Benchmarking makes asset managers invest more in the index than they would have otherwise. We show that this in turn increases the price of assets in the index, and makes the asset returns more volatile and more correlated. Because investors do not account for these effects of their contracts on equilibrium asset prices, privately-optimal contracts involve an externality. We want to explore how the contract chosen by the social planner differs from the privately-optimal one. We also plan to analyze the equilibrium effects of an expansion of the asset management sector. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1030&r=cta |